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STAFF PAPER September 2017

IFRS® Interpretations Committee Meeting

Project IAS 12 Income Taxes—Interest and penalties Paper topic Agenda decision to finalise CONTACT(S) Craig Smith csmith@ifrs.org +44 (0)20 7332 6462

This paper has been prepared for discussion at a public meeting of the IFRS Interpretations Committee (Committee). Comments on the application of IFRS Standards do not purport to set out acceptable or unacceptable application of IFRS Standards—only the Committee or the International Accounting Standards Board (Board) can make such a determination. Decisions made by the Committee are reported in IFRIC® Update. The approval of a final Interpretation by the Board is reported in IASB® Update.

Introduction

1. In March 2017 the IFRS Interpretations Committee (Committee) discussed interest

and penalties related to income taxes (interest and penalties). This discussion resulted

from comments received in response to the draft Interpretation Uncertainty over

Income Tax Treatments (draft Interpretation).

2. The Committee redeliberated the proposals in the draft Interpretation at its meeting in

September 2016. Having considered the feedback, the Committee decided that the

Interpretation would apply to income taxes within the scope of IAS 12 Income Taxes,

and would not specifically address interest and penalties (see IFRIC Update

September 2016). Some Committee members, however, observed that the absence of

specific requirements for interest and penalties has resulted in entities applying

diverse reporting methods. Accordingly, the Committee decided to consider whether

it should add a separate project to its agenda to address how an entity accounts for

such interest and penalties.

3. Agenda Paper 6 of the March 2017 meeting described research conducted on the topic

of interest and penalties. This included feedback on the draft Interpretation, previous

discussions by the Board and the Committee, research of publicly available data and a

review of other accounting literature (US GAAP).

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4. This research identified that entities typically apply either IAS 12 or IAS 37

Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. The

research did not identify whether (a) the application of different Standards is the result

of different tax legislation in different jurisdictions (and thus appropriately reflects

underlying differences in the nature of interest and penalties) or (b) entities apply

different Standards in similar situations. It also did not provide evidence that the

diversity is widespread and has a material effect on the amounts that entities report.

5. That paper also discussed the implications of applying IAS 12 versus IAS 37, and

outlined some possible standard-setting alternatives for the Committee to consider.

6. In the tentative agenda decision the Committee noted that:

(a) if an entity determines that amounts payable or receivable for interest and

penalties are income taxes, then the entity applies IAS 12 to those amounts.

If an entity does not apply IAS 12 to interest and penalties, then it applies

IAS 37 to those amounts; and

(b) regardless of whether an entity applies IAS 12 or IAS 37 when accounting

for interest and penalties, the entity would disclose information about those

interest and penalties if it is material.

7. The purpose of this paper is to:

(a) analyse the comments received on the tentative agenda decision; and

(b) ask the Committee whether it agrees with the staff recommendation to

finalise the agenda decision.

Comment letter summary and staff analysis

8. We received five comment letters, reproduced in Appendix C to this paper. Deloitte,

KPMG and Mazars agree with the Committee’s decision not to add the matter to its

standard-setting agenda for the reasons outlined in the tentative agenda decision.

However, they say that some aspects of the agenda decision require further clarity.

9. Two respondents, EY and ASBJ, disagree with the tentative agenda decision. Both

respondents note they are aware of diversity in how entities account for interest and

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penalties. Both therefore say that the Committee should add a project on interest and

penalties to its standard-setting agenda.

10. Respondents’ concerns, together with our analysis, are presented below.

Diversity in accounting for interest and penalties

Concern raised by respondent

11. EY and ASBJ note that they are aware of diversity in accounting for interest and

penalties. ASBJ says this has resulted in some entities applying either IAS 12 or IAS

37 to interest and penalties in the same jurisdiction where the same tax legislation

applies.

12. ASBJ says this can have an effect on the amount entities recognise for interest and

penalties in their statements of profit or loss and financial position. It also says

providing disclosure is insufficient in providing useful information in the financial

statements. This contrasts with Mazars, which supports highlighting in the agenda

decision the disclosure requirements in IAS 12 and IAS 37.

13. EY says diversity also affects the timing of recognition of assets for interest

receivable and the measurement of liabilities for interest and penalties.

Staff analysis

14. In their responses to the draft Interpretation, EY and ASBJ both asked the Committee

to address interest and penalties as part of the Interpretation. Their responses to the

draft Interpretation cited the same reasons as those in their comment letters on the

tentative agenda decision.

15. Further discussion with ASBJ indicated that the main effect of applying IAS 12

instead of IAS 37—and vice versa—relates to presentation in the statement of profit

or loss. This aligns with our views outlined in Agenda Paper 6 of the March 2017

meeting.

16. As noted in paragraph 3, we performed research on publicly available financial

statements, which did not provide evidence that the absence of specific requirements

on interest and penalties has resulted in material differences in the reporting of interest

and penalties of a similar nature.

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17. Since the March 2017 meeting we have been provided with additional research, the

results of which are summarised as follows:

(a) Review of IFRS financial statements—The researcher reviewed the

financial statements of the 100 largest entities that prepare IFRS financial

statements. This is similar to the review we performed before the March

2017 Committee meeting, and the results are also similar. The researcher

found six entities that disclose an accounting policy for interest and

penalties—all six present interest and penalties as income taxes. None of

these entities disclose the amount of interest and penalties. The research

also identified one entity that discloses an amount of ‘tax-induced interest’

as part of its disclosures on IAS 37 provisions.

(b) Review of US GAAP financial statements—US GAAP Topic 740 Income

Taxes contains requirements for interest and penalties. In particular,

paragraph ASC 740-10-45-25 allows entities a choice of where to present

interest and penalties in the income statement (ie as income tax or

alternatively as an interest expense for interest and an expense for

penalties). The researcher reviewed the financial statements of 26 large

corporates that prepare US GAAP financial statements to assess the

significance of interest and penalties. Six entities did not disclose the

amount of interest and penalties. 18 of the other 20 entities present interest

and penalties as income tax. The researcher’s results are presented in

Appendix B to this paper. The researcher compared:

(i) the amount of interest and penalties recognised in profit or loss to the amount of income tax. On average the charge for interest and penalties represents 2% of the total income tax charge for the year, excluding one outlier of -23%.

(ii) the carrying amount of accrued interest and penalties to the disclosed amount of uncertain tax positions. On average the year-end liability for interest and penalties is 11% of the disclosed amount of uncertain tax positions. This excludes two outliers, for which the liability for interest and penalties is 40% and 186% of the uncertain tax positions.

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(c) Qualitative survey—The researcher also reviewed tax legislation in

Australia, France, Greece, Italy, Spain and the US. The researcher found

that tax authorities charge interest on amounts owed at between 3.5% and

9% per annum. This is typically calculated on a compound basis from the

due date of the payment to the tax authorities. Tax authorities typically

charge penalties when an entity fails to submit a tax return on time, fails to

pay tax on time or when the tax return contains errors or omissions.

Penalties can be fixed or can vary depending on (i) the entity’s willingness

to co-operate with the tax authority, (ii) the existence of fraudulent

behaviour, (iii) the entity’s past behaviour and (iv) the scope of transactions

covered by the disputed tax amount. Variable penalties can range from

between 10% and 270% of tax payable across these jurisdictions.

18. We consider these findings in reaching our staff recommendation in paragraphs 31-37

of this paper.

Scope of IAS 12

Concern raised by respondent

19. KPMG says the tentative agenda decision, as worded in the March 2017 IFRIC

Update, could pose significant challenges for entities. In particular it is concerned that

the wording of the tentative agenda decision could be read to require an entity, as a

first step, to determine whether interest and penalties are income taxes in the scope of

IAS 12. KPMG says this causes the following challenges:

(a) IAS 12 does not explicitly include interest and penalties in its scope, as

acknowledged by the Committee when it discussed the topic;

(b) the definition of income tax—ie a tax based on taxable profit—does not

refer to interest or penalties; and

(c) it is not clear how one could apply the principle of a ‘net amount’ (implied

from the definition of income tax (see May 2009 IFRIC Update)) to interest

and penalties, which themselves are generally ‘gross’ amounts.

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20. Deloitte suggests expanding the agenda decision to provide more information on how

an entity determines whether an income tax is in the scope of IAS 12. It says an entity

should make this determination based on the specific facts and circumstances that

give rise to the interest and penalties (for example, interest and penalties might be in

the scope of IAS 12 because they are in substance part of a larger uncertain tax

position. In contrast, they might be in the scope of IAS 37 if they arise from late

payment when there is no uncertainty regarding the amount of income tax payable).

21. As noted in paragraphs 11–12, EY disagrees with the tentative agenda decision.

However, EY also says that if the Committee finalises the agenda decision, then it has

suggestions for amendments to the draft wording. EY says the phrase ‘if an entity

does not apply IAS 12 to interest and penalties, then it applies IAS 37 to those

amounts’ in the tentative agenda decision could be read to imply that if an entity does

not determine interest and penalties to be in the scope of IAS 12, then it either has an

accounting policy choice between IAS 12 and IAS 37 or must apply IAS 37 in all

circumstances. EY says that, in its view, an entity should consider the facts and

circumstances pertinent to the situation in order to determine whether to apply IAS 12

or IAS 37. EY therefore recommends clarifying in the agenda decision that an entity

should consider the requirements in paragraphs 7-12 of IAS 8 Accounting Policies,

Changes in Accounting Estimates and Errors in making this determination.

22. In addition, when accounting for uncertain tax treatments, KPMG says it may be

challenging to distinguish between the amount of tax and the amount of interest if the

amount payable to (or receivable from) the tax authority is negotiated as a single

amount, without distinguishing the portion that relates to interest and penalties.

Staff analysis

Whether to apply IAS 12 or IAS 37

23. Although neither IAS 12 nor IAS 37 explicitly mention interest and penalties, we

think an entity would not generally refer to IAS 8 in determining its accounting policy

for interest and penalties. We do not therefore recommend including a reference to

IAS 8 in the agenda decision.

24. Income taxes are in the scope of IAS 12. Paragraph 2 of IAS 12 defines income taxes

as including ‘all domestic and foreign taxes which are based on taxable profits’.

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Paragraph 1 of IAS 37 states that IAS 37 applies to provisions, contingent liabilities

and contingent assets, unless they are covered by another Standard. Paragraph 5(b) of

IAS 37 specifically states that any provision an entity accounts for applying IAS 12 is

not in the scope of IAS 37.

25. Because IAS 37 excludes from its scope any amounts to which IAS 12 applies, in our

view an entity is first required to consider whether a particular amount payable (or

receivable) for interest and penalties is in the scope of IAS 12—ie is an income tax as

defined by that Standard. If an entity considers that a particular amount of interest or a

penalty is not in the scope of IAS 12, then it applies IAS 37 to that interest or penalty.

26. In paragraph 6 of Agenda Paper 6 of the March 2017 Committee meeting we provided

a definition of interest and penalties. We understand that interest charges (or receipts)

related to income taxes are generally intended to compensate the tax authority (or the

entity) for the time value associated with the under (over) payment of income taxes.

Penalties related to income taxes are generally charges levied on an entity, under

income tax legislation, related to the underpayment or late payment of income taxes.

27. As noted in paragraph 38 of Agenda Paper 6 of the March 2017 Committee meeting,

we think that often identified amounts of interest and penalties may not meet the

definition of income tax in IAS 12. This is because they are typically not based on

taxable profits.

Assessing whether interest and penalties are income taxes

28. In considering whether an amount of interest or a penalty is in the scope of IAS 12, an

entity considers whether the interest or penalty is a tax and whether that tax is based

on taxable profits.

29. Two previous agenda decisions address the definition of an income tax. In March

2006 the Committee discussed the scope of IAS 12, noting that because taxable profit

is not the same as accounting profit, taxes do not need to be based on a figure that

exactly matches accounting profit to be within the scope of IAS 12. In addition, as

noted by KPMG in its comment letter, in May 2009 the Committee published an

agenda decision on tonnage taxes, which includes an observation that the term

‘taxable profit’ implies the notion of a ‘net’ amount rather than a ‘gross’ amount.

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30. Taken together, we think these imply that to be in the scope of IAS 12 ‘taxable

profits’ must be based on (net) profit or loss (or adjusted profit or loss) as specified by

tax legislation. We think it is the notion of a net amount that identified amounts of

interest and penalties may fail to meet. In addition, taxable profits do not necessarily

have to be the same as an entity’s reported accounting profit.

Identifying interest and penalties

31. We acknowledge that in some situations it might be difficult to identify whether an

amount payable to (or receivable from) a tax authority includes interest or penalties.

For example, this might be the case when the total amount payable to a tax authority

is negotiated as a single amount (as noted by KPMG). The research included in

Agenda Paper 6 to the March 2017 Committee meeting highlighted this, as did

members of the Global Preparers Forum (GPF) at the GPF meeting in March 2017.

32. Nonetheless, we do not recommend adding commentary on the identification of

interest and penalties to the agenda decision. This is because to do so, in our view,

would be interpretative in nature and would not be supported by existing

requirements.

Staff recommendation

33. Having considered the research on publicly available financial statements described in

Agenda Paper 6 of the March 2017 meeting and the additional research summarised in

this paper, we recommend that the Committee does not add this matter to its standard-

setting agenda. We acknowledge that interest and penalties can be material for some

entities, and that many entities incur interest and penalties. However, from the

evidence obtained through our own research as well as the additional research

provided to us, we think there is insufficient evidence of widespread material diversity

in the amounts that entities report.

34. As noted in Agenda Paper 6 of the March 2017 meeting, we think that if the Board or

the Committee were to undertake standard-setting regarding interest and penalties,

they could consider a narrow-scope amendment to IAS 12 to explicitly include

interest and penalties related to income taxes within its scope. Such a narrow-scope

amendment would not change the definition of income taxes in IAS 12, but instead

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simply expand the scope of the Standard. We think this would be the simplest and

most straight-forward way of addressing any diversity in reporting in this respect.

35. However, such a proposal may not be acceptable to stakeholders because:

(a) as noted by Deloitte, some may view interest related to income taxes (in at

least some circumstances) to be more akin to finance costs than tax

expense—and penalties to be an operating expense, not a tax expense. The

distinction between operating expenses, financing expenses and tax is an

issue that stakeholders have raised on a number of Standards and projects.

(b) some may see little benefit in such a narrow-scope project when there are

other identified questions regarding IAS 12, including its scope—see

paragraph 36 below.

36. Questions on the definition of income taxes have arisen in the context of determining

whether particular taxes are in the scope of IAS 12. Paragraphs 50 and 51 of Agenda

Paper 19A of the Board’s May 2016 meeting noted that a tax is generally in the scope

of IAS 12 if it is based on (net) profit or loss (or adjusted profit or loss) and is

generally not in the scope of IAS 12 if it is based on revenue or other factors.

However, the staff were informed that it is difficult to determine whether, for

example, the following types of tax are in the scope of IAS 12—(a) tax based on

revenue less some expenses, (b) tax based on an amount close to the amount subject

to value added tax, (c) tax based on two or more systems.

37. The Board discussed these questions, as well as others that it had been informed about

regarding IAS 12, as part of its 2015 Agenda Consultation. It decided to add neither a

narrow-scope project to its agenda, nor a wider project on IAS 12. In our view, the

information obtained regarding interest and penalties does not highlight that the

accounting for interest and penalties is in greater need of improvement than, for

example, the accounting for taxes more generally.

38. In summary, we continue to agree with the Committee’s tentative conclusion that a

project on interest and penalties is not a higher priority than other projects already on

the Board’s or Committee’s agenda, nor a higher priority than some other projects not

on the Board’s or Committee’s agenda.

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39. We recommend confirming the tentative agenda decision as published in the March

2017 IFRIC Update. We recommend some editorial changes to bullet (a) to align the

wording with that used in the basis for conclusions on IFRIC 23 Uncertainty over

Income Tax Treatments. Appendix A to this paper sets out the draft wording for the

final agenda decision.

Question for the Committee

Does the Committee agree with the staff recommendation to finalise the agenda

decision outlined in Appendix A to this paper?

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Appendix A—Proposed wording for final agenda decision

A1. We propose the following wording for the final agenda decision (new text is

underlined and deleted text is struck through).

IAS 12 Income Taxes—Interest and penalties related to income taxes

IFRS Standards do not specifically address the accounting for interest and

penalties related to income taxes (interest and penalties). Respondents to the draft

IFRIC Interpretation Uncertainty over Income Tax Treatments said that entities

apply either IAS 12 or IAS 37 Provisions, Contingent Liabilities and Contingent

Assets to interest and penalties.

In the light of this feedback, the Committee considered whether to add a project

on interest and penalties to its standard-setting agenda.

On the basis of its analysis, the Committee concluded that a project on interest

and penalties is not a higher priority than other projects already on the Board’s or

Committee’s agenda. Consequently, the Committee [decided] not to add a project

on interest and penalties to its standard-setting agenda.

Nonetheless, the Committee observed the following:

a. if an entity determines that considers a particular amounts payable or

receivable for interest and penalties are to be an income taxes, then the

entity applies IAS 12 to those that amounts. If an entity does not apply

IAS 12 to a particular amount payable or receivable for interest and

penalties, then it applies IAS 37 to those that amounts;

b. paragraph 79 of IAS 12 requires an entity to disclose the major

components of tax expense (income); for each class of provision,

paragraphs 84-85 of IAS 37 require a reconciliation of the carrying

amount at the start and end of the reporting period as well as various other

pieces of information. Accordingly, regardless of whether an entity

applies IAS 12 or IAS 37 when accounting for interest and penalties

related to income taxes, the entity would disclose information about those

interest and penalties if it is material; and

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c. paragraph 122 of IAS 1 Presentation of Financial Statements requires

disclosure of the judgements that management has made in the process of

applying the entity’s accounting policies and that have the most

significant effect on the amounts recognised in the financial statements.

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Appendix B—US GAAP financial statements information

Industry of preparer1

Accounting Policy Balance Sheet Profit and Loss Account

Interest Penalties

Interest and penalties USD

Uncertain tax position USD Comparison2

Interest and penalties USD

Income tax USD Comparison3

Conglomerate Interest expense Income tax 833 4,692 18% (109) 464 -23% Technology Income tax Income tax 1,000 7,724 13% (295) (15,685) 2% Manufacturing Interest expense Income tax 67 1,586 4% 3 (2,189) 0% Technology Income tax Income tax 193 10,900 2% Not disclosed (1,095) N/A Retail Trade Income tax Income tax 117 924 13% (41) (2,180) 2% Oil and gas Interest expense Operating expense 191 9,468 2% (4) (406) 1% Oil and gas Interest expense Operating expense 54 381 14% 18 (12,973) 0% Oil and gas Income tax Income tax 424 3,031 14% (38) (1,729) 2% Oil and gas Income tax Income tax 13 7 186% 5 (609) -1% Oil and gas Income tax Income tax 70 936 7% Not disclosed (765) N/A Technology Income tax Income tax 67 1,710 4% (9) (1,425) 1% Manufacturing Income tax Income tax - 1,557 0% Not disclosed (306) N/A Technology Income tax Income tax 1,900 10,164 19% (163) (2,953) 6% Pharmaceutical Not disclosed Not disclosed 343 857 40% Not disclosed (3,342) N/A Pharmaceutical Income tax Income tax 344 3,041 11% (7) (3,263) 0% Pharmaceutical Income tax Not disclosed 771 5,826 13% (72) (1,123) 6% Pharmaceutical Income tax Income tax 129 854 15% (26) (1,408) 2% Technology Income tax Income tax Not disclosed Not disclosed N/A Not disclosed (420) N/A

1 All financial statement information is from the entity’s financial statements ended in 2016. 2 Calculated as Interest and penalties / Uncertain tax position 3 Calculated as Interest and penalties / Income tax expense

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Technology Not disclosed Not disclosed Not disclosed Not disclosed N/A Not disclosed (1,311) N/A Manufacturing Other income Other income Not disclosed 192 N/A Not disclosed (5,594) N/A Technology Interest expense Income tax 90 993 10% (3) (843) 0% Manufacturing Income tax Income tax Not disclosed 63 N/A Not disclosed (707) N/A Technology Interest expense Income tax 172 760 23% (27) (781) 3% Pharmaceutical Income tax Income tax 0 2 2% 0 32 0% Pharmaceutical Income tax Income tax 83 734 11% (18) (521) 3% Pharmaceutical Income tax Income tax 25 118 21% 7 683 1% Average 20% 0% Average excluding outliers 11% 2%

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Appendix C—Copies of comment letters

Ernst & Young Global Limited is a company limited by guarantee registered in England and Wales No. 4328808.

Ernst & Young Global Limited6 More London Place London SE1 2DA

Tel: +44 [0]20 7980 0000 Fax: +44 [0]20 7980 0275 ey.com

International Financial Reporting Standards Interpretations Committee 30 Cannon Street London EC4M 6XH

19 April 2017

Dear IFRS Interpretations Committee members, Tentative agenda decision – IAS 12 Income Taxes— Interest and penalties related to income taxes

Ernst & Young Global Limited, the central coordinating entity of the global EY organisation, welcomes the opportunity to offer its views on the above tentative agenda decision of the IFRS Interpretations Committee (the Committee) published in the March 2017 IFRIC Update.

The Committee discussed accounting for interest and penalties related to income taxes after “[r]espondents to the draft IFRIC Interpretation Uncertainty over Income Tax Treatments [had] said that entities apply either IAS 12 or IAS 37 Provisions, Contingent Liabilities and Contingent Assets to interest and penalties.”

In light of the current lack of guidance and the diversity in practice that has been identified, we are disappointed by the Committee’s decision not to take on a project on interest and penalties. In our experience, the amounts of interest and penalties are often very significant. As noted in the Committee’s agenda paper, the diversity in current practice affects the timing of recognition of assets for interest receivable, the measurement of liabilities, and the presentation of interest and penalties in the statement of profit or loss. When IFRIC [23] on uncertain tax positions is issued, it may introduce further diversity in practice by widening the gap between IAS 12 / IFRIC [23] and IAS 37 recognition and measurement.

The Tentative Agenda Decision notes as the sole reason for not taking on the issue, that the Committee concluded that “…a project on interest and penalties is not a higher priority than other projects already on the Board’s or Committee’s agenda.” As such, we would be concerned that the relative priority of a project was used by the Committee as a criterion to decide whether to put an item on the agenda or address an item in an Interpretation, particularly as the IASB currently does not have an active income tax project. We accept that the ‘interest and penalty’ topic was not a formal submission to the Committee, but we believe that a number of respondents asking in their public comment letters for the topic to be addressed by the Committee is equivalent to a formal submission. This applies in particular now that the Committee has formally considered whether to add a project on interest and penalties to its standard-setting agenda in response to those comment letters.

2

We therefore ask the Committee to reconsider its Tentative Agenda Decision. Nevertheless, if the Committee decides not to change its tentative view, we do not agree with several other aspects of the Tentative Agenda Decision, as worded in the March 2017 IFRIC Update.

We agree that “if an entity determines that amounts payable or receivable for interest and penalties are income taxes, then the entity applies IAS 12 to those amounts.” However, we disagree with the subsequent sentence in the agenda decision, which states that, “If an entity does not apply IAS 12 to interest and penalties, then it applies IAS 37 to those amounts.” In our view, the wording of the Tentative Agenda Decision is insufficiently clear as it suggests that, with respect to interest and penalties that are outside the scope of IAS 12, entities either: (1) have a free accounting policy choice between IAS 12 and IAS 37; or (2) must apply IAS 37 in all circumstances.

We believe that entities should consider the facts and circumstances pertinent to the situation (e.g., where interest and penalties are tax deductible, it seems more appropriate to present them as part of expenses in arriving at profit before tax; and where interest and penalties are not themselves tax deductible, there is an argument for treating them as an IAS 12 income tax). We therefore recommend to clarify the wording in the Agenda Decision to note that an entity should consider the requirements of paragraphs 7 to 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in determining whether they should apply the requirements of IAS 12 or IAS 37 (e.g., “In all other cases, an entity should consider the requirements of paragraphs 7 to 12 of IAS 8 in selecting an appropriate accounting policy for interest and penalties”).

Should you wish to discuss the contents of this letter with us, please contact Leo van der Tas at the above address or on +44 [0]20 7951 3152.

Yours faithfully

Deloitte Touche Tohmatsu Limited2 New Street Square London EC4A 3BZ

Phone: +44 (0)20 7936 3000 Fax: +44 (0)20 7583 1198 www.deloitte.com/about

Direct phone: +44 20 7007 0884 vepoole@deloitte.co.uk

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

Deloitte Touche Tohmatsu Limited is a private company limited by guarantee incorporated in England & Wales under company number 07271800, and its registered office is Hill House, 1 Little New Street, London, EC4a, 3TR, United Kingdom.

© 2017 . For information, contact Deloitte Touche Tohmatsu Limited.

Dear Ms Lloyd

Tentative agenda decision – IAS 12 Income Taxes: Interest and penalties related to income taxes

Deloitte Touche Tohmatsu Limited is pleased to respond to the IFRS Interpretations Committee’s publication

in the March IFRIC Update of the tentative agenda decision not to take onto the Committee’s agenda the

request for clarification on the accounting for interest and penalties related to income taxes.

We agree with the IFRS Interpretations Committee’s decision not to add this item onto its agenda but are

concerned that the statement in the tentative agenda decision that “if an entity determines that amounts

payable or receivable for interest and penalties are income taxes” is unclear on how such a determination

should be made and could be read as suggesting that this is a free choice in all cases.

As such, we recommend that the tentative agenda decision be expanded to state that the determination of

whether interest and penalties are, in fact, in the scope of IAS 12 (for example, because they are in

substance part of a larger uncertain tax position rather than resulting from delayed payment when there is

no uncertainty regarding the amount of income tax payable) should be made based on the specific facts and

circumstances in which they are incurred.

If you have any questions concerning our comments, please contact Veronica Poole in London at +44 (0) 20

7007 0884.

Yours sincerely

Veronica Poole

Global IFRS Leader

22 May 2017

Sue Lloyd Chair IFRS Interpretations Committee 30 Cannon Street London United Kingdom EC4M 6XH